Voluntary Disclosure for Filing Late Foreign Bank Account Reports
The Internal Revenue Service is in the middle of a crackdown on US citizens who haven't filed foreign bank account reports in the past and who haven't reported income earned in those accounts. Here's a common situation that people have found themselves in that's reflective of the sort of questions I've been getting lately:
"Both my wife and I gain the status of USA permanent residents in July 2006. Prior to that we lived in another country (Romania) and we still are Romanian citizens. When we moved here in USA (as I said, in July 2006) we still left some of our money in a Romanian bank account(s). And now the question(s): Do I have to declare these accounts? Should I fill & file a TD F 90-22.1 form for this? Do I have to declare the interest? I should say that in Romania the 'federal tax' in subtracted automatically from the interest, so you as a person do not have to worry anymore about declaring it. As a result, I already paid taxes to Romania government for that money."The IRS has instituted a voluntary disclosure program for situations like these. Here's what we know about the program so far.
If you reported all the income earned on in your foreign accounts, but you didn't file the foreign bank account reports (FBAR), then you don't need to go through voluntary disclosure, and the penalties outlined in the voluntary program would not apply. Simply file any missing FBARs with the Treasury Department in Detroit, and send copies of these FBARs to the IRS. (See FAQ question 9.)
If you didn't report the income earned in the foreign accounts, then the IRS is asking you to go through the voluntary disclosure process. You'll need to file amended returns, provide copies of your FBARs, and pay penalties.
The penalties are rather stiff. In a memo dated March 23, 2009, the following penalties will apply for taxpayers who come forward under the voluntary disclosure program:
- Interest on the understated taxes,
- Either an accuracy related penalty of 20% or 40% or a delinquency penalty (calculated on the understated tax),
- An additional penalty of either 5% or 20% of the foreign account balance for the year with the highest aggregate value.
The IRS has outlined most the pertinent information in their FAQ and penalty guidelines memo. Here's some important points that stick out for me:
- IRS determinations resulting from the voluntary disclosure program cannot be appealed. However, tax and penalty calculations can be appealed. (See FAQ question 28.)
- If a taxpayer disagrees with the IRS's determinations, the tax returns and FBAR will be routed to auditors to re-examination the entire case. (Also in FAQ question 28.)
- Voluntary disclosures must be submitted or in processing by September 23rd, 2009. So even if a taxpayer needs extra time to find source documents, then could still start the disclosure process before the program ends. (See FAQ question 18.)
- After this particular disclosure program ends, the IRS will evaluate the program and "decide whether or how to continue" the program. (See FAQ question 16.)
- The lower 5% penalty applies only if the taxpayer did not open any foreign accounts, make any deposits or withdrawals, in the six-year look back period. (See penalty memo, page 2.)
What discretion will agents have in determining penalties? Agents "do not have discretion to settle cases for amounts less than what is properly due and owing" (new FAQ 35). In other words, the only thing taxpayers can do is argue for the lower 5% penalty and/or make sure the penalty (whether 5 or 20%) is calculated correctly.
Will there be any consideration given to the size of the foreign accounts? Again, it seems IRS agents will not have any discretion or leeway to adjust penalties based on the unique facts and circumstances of the taxpayer.
There's still a lot of unanswered questions I have about this program:
- What if the account balances have declined in value? It's conceivable that investment loss could have drastically reduced the value of the account. Will the 20% penalty still apply?
- What if the taxpayer, as in the scenario emailed to me, was and still is a foreign national? Clearly there's no intent here to move money out of the US. Will they be penalized the same?
- What procedures, exactly, are in place to identify the so-called quiet disclosures? (See FAQ question 10 and new FAQ 49.)
- What will be the time line for responding to people who make disclosures?
- How much is the delinquency penalty and under which circumstances will it be applied?
- What if the taxpayer has no US income tax liability after reporting the foreign income and taking a foreign tax credit? In this case, there's no understatement of tax. Would they still be penalized 5% or 20%? (See, for example, new FAQ 37.)
More resources:
- Offshore Income Unit Voluntary Disclosure Program (IRS.gov)
- Frequently Asked Questions about the Voluntary Disclosure Program (pdf, 12 pages, IRS.gov, 5/6/2009)
- Second Set of Frequently Asked Questions (pdf, 19 pages, IRS.gov, published 6/24/09)
- Memorandum Authorizing Application of Penalty Framework (pdf, 2 pages, IRS.gov)
- Download the TD F 90-22.1, Foreign Bank Account Report (pdf, 8 pages, IRS.gov)
William,
Good update-I have a significant situation where the penalties good be quite large-but the taxpayer has no US tax liability after the foreign tax credit. Do you have any more guidance on this situation that you can provide? Thanks
Charlie
Charlie, sorry I haven’t heard anything further. The way I read the FAQs as they are currently written, for that situation there will be no tax, thus no interest or accuracy penalty, but there would still be the 20% penalty on the highest account value. (Or 5% if you can convince them that your client meets the criteria for the lower penalty.)
Hi William,
I’ve filed FBARs for years for foreign bank and investment accounts, and everything is reported on my taxes. But now I’m worried about my employment retirement plans from years working in Britain. These were frozen when I left the UK years ago, waiting for me to get older. The only way to get money out is to apply to take your pension; I can’t borrow money like I can from a 401k. Should these be reported on FBAR? And does it make a difference if I’m old enough now to start taking the pension ‘early’, under UK law; but haven’t because I’m not yet at full retirement age ?
Thank you! this feels like a minefield to me.
Hi Melinda,
This feels like a minefield to me too. Fortunately, when I talked to the IRS about the foreign bank account report, they said that foreign pensions do not have to be reported unless you directly own the account. (Scroll down to the section on foreign pensions in my article on the FBAR for a quote from the IRS.) So at least in this case, there’s “less” of a minefield. Hope that helps!
Hi William,
I’m a US citizen living and working abroad. I’ve filed and paid my taxes until 2003, and have failed to file returns from 2004 to 2008. I have, however, from 2004 to 2008, send in a payment every year before 15 April, and in fact have been determined by my accountant (recently hired) that I’ve overpaid my taxes every year. I do not owe the government any taxes. Some people told me I need to go through the Voluntary disclosure program, and some told me it doesn’t apply to me since I’ve paid all my taxes and certainly have no intention to hide any income. Please can you advise on whether I need to go through the voluntary disclosure route. If I go the “quiet” route, what are my risks?
Ed, good question! Although it’s unclear from the way the voluntary disclosure FAQs are written, I suspect that any investment income on your foreign accounts will turn out not to have any US tax liability. Thus, there’s no under-reported tax, and so I’d push for no penalties. However, it’s still not clear to me whether “quiet” vs. “noisy” disclosure is better. With quiet disclosure, the client preserves his ability to claim any reasonable cause defenses; where with the “noisy” voluntary disclosure you’ll waive the right to ask for penalties to be reduced based on reasonable cause. You’ll want to figure out your answer in time to make the Sept 23rd deadline.
I am a canadian citizen. I have an RRSP account in Canada. It is a Registed Retirement Saving Plan like pretaxed IRA in US. You do not pay taxes until you get old and take the money out. Do I need to disclose this account. Also if I have a joint account with a canadian living in Canada and he/she pay all taxes on the account in Canada, will that need to be disclosed?
Thanks!
Lily, if you are also a US green card holder, then you’ll need to report any RRSP or RRIF accounts you have. See, for example, Form 8891. You would also need to report any accounts you own jointly with another person, even if that joint account holder doesn’t need to file his own FBAR.
Does anyone know if there is a minimum threshold for reporting under the “Voluntary Disclosure” or for an amended return?
After going through all of the paperwork I’ve realized I’ve under-reported interest income by US$149 over a 5 year period. That amount of money is meaningless in the grand scheme of things and as such I wouldn’t think it is material enough for the ‘Voluntary Disclosure’. Still on a technical basis since I didn’t know about the FBAR disclosure I haven’t filed it before this year. As such reading the press releases and FAQs it seems the IRS can penalize me at 20% or 50% of the maximum total value in the account at any point in time. Say I held $100,000 in the account but only received $100 of interest in a given year (very possible for checking accounts). It seems ridiculously inequitable that you can be penalized $50k for a total of $100 of interest income. This law needs to be re-written to address this minor but very annoying issue.
There is no minimum threshold for reporting under the IRS’s voluntary disclosure program for late-filed FBARs. The Q&As published by the IRS do provide a zero-penalty structure if there’s no change in US tax as a result of filing the FBARs and amended returns (see Q&A 9). If there is a US tax as a result of the amended return, it’s likely you would be subject to either the 5% or 20% penalty structures. The alternative would be to forego voluntary disclosure and make a so-called “quiet disclosure” instead by filing the amended returns and late FBARs as you normally would. Which tactic is better for you depends on a variety of factors, and is best answered by a licensed accountant or attorney who can advise you specifically. The deadline for submitting this is today, October 15th. So you might want to seek some professional advice quickly.
still looking for a little advise as I read more information. (a). I was not trying to hide this bank account, (b). This account was opened in my name and using my Canadian SIN and my Canadian residence and not my US SSN and US address.
William, this is a very informative page. Thanks for sharing. I am a Green Card holder of some 15 mths prior to that H1b for four or so years. I didn’t realize that I had to file TDF’s or declare WW Income. The upside is that due to O/Seas Rental Real Estate losses I have clearly over declared my Federal Tax Liability for each and every year. I also declared the Income on Overseas Tax Returns. The downside is the fact that I didn’t file the TDF’s and I can see that the IRS could easily take all my savings (and more) if they felt so inclined even though there was no attempt (or intent) to hide anything. I was advised not to take the Voluntary Disclosure Route rather to file the TDF’s + 1040X’s + a covering letter. I have now been waiting two and a half months which seems to be getting harder and harder to cope with as the days go by. This is so stressful that I wish we’d never come here. The IRS offer no advice to H1b holders – its almost like they want you to make these sort of mistakes. I feel very apprehensive right now. My wife’s (who has been a purely passive participant ) LIFE savings are on on the line too so she is very dark with me right now (I filed joint returns for us). The max value of the accounts is/was ~$220k. I am in my 50’s so if I get clobbered there is no realistic way of building up our savings again. I am struggling to believe this has happened. Do you have any comments on our circumstances or any idea of their timeframe of operation? Thanks.